Evidence of meeting #38 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was sector.
A recording is available from Parliament.
Liberal
The Chair Liberal Wayne Easter
Okay. Thank you both.
Before I start the next round, I would remind people that if you do have a key point you want to raise when somebody else is giving an answer, raise your hand. I may catch you. I can't see everybody on my screen at the same time, but raise your hand and we'll try to get you in.
We'll go to very strict five-minute rounds so we can get more people on. We have Mr. Morantz followed by Mr. Fragiskatos.
Marty.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Thank you.
Mr. Porter, I want to ask you a few questions. Recently we had the president of CMHC on. He had talked about tightening underwriting requirements for residential mortgages, and then shortly thereafter they did it. I'm just wondering whether you agree with those changes.
Chief Economist, BMO Bank of Montreal
It's very interesting. In the early stages of this downturn, we saw the housing market essentially lock down for a while. We saw almost an identical decline in sales and in listings, so there's been very little change in pricing.
Before this all began, it actually looked as though the housing market was on the edge of overheating in some key markets, like Montreal in particular and, to a lesser extent, Ottawa. That, of course, is no longer a concern. I still think that given the lengthy workout we're going to be looking at over the next year or so, there are probably more downside risks than upside risks to the housing market.
The measures that have been taken so far are relatively modest, but I would push back against tightening up a lot further until we see the market settle out over the next year or so. I think there is just too much downside risk to embark on really tough tightening measures at this point.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
One thing I'm having trouble reconciling is that you have CMHC, on the one hand, tightening underwriting requirements, and yet through—and I'm not arguing that we shouldn't have the emergency programs—the BCAP you have banks, and commercial loans are being either joint ventured with the federal government or guaranteed, and so loans are being made that wouldn't normally be made under typical circumstances.
Can you reconcile for me why there are two different approaches? Why is one branch of government tightening its underwriting requirements while essentially another branch is loosening its underwriting requirements at the same time?
Chief Economist, BMO Bank of Montreal
I can't necessarily reconcile that.
I understand that some of the tightening measures that were introduced by CMHC are of a longer-term nature. I think at this stage they're just trying to protect potentially the most vulnerable debtors from getting in too deep. I don't think they were necessarily aimed at the broader macro housing market.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Just to move on, I want to ask you about Canada's credit rating and whether you have any views on that. In my time on city council we had to meet with the credit rating agencies. They didn't really care much why we were in debt; they just cared about how much we were in debt and whether our balance sheet could support it.
Again, I'm not arguing against the emergency programs, but the reality is that Canada's going to be hitting over $1 trillion in net debt, probably, before the end of this fiscal year. Do you think that our credit rating might suffer?
Chief Economist, BMO Bank of Montreal
I think your first point is an accurate one, that the ratings agencies really aren't concerned about why a borrower gets into a situation; they're just looking at the end result.
We've already seen that during the worst of the pandemic, some ratings have already come under question. There actually have already been some sovereign downgrades in the last month or so. Certainly, Canada's not immune on this front. I'm sure the ratings agencies will take a long look at every sovereign borrower because of the dramatic changes we've seen in fiscal policies.
The one thing I would point out is that we have seen significant deteriorations in government finances right around the world as a result of this.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I'm wondering whether you have a sense of what the tax base post-COVID might look like.
Businesses have carryback and carry-forward loss provisions. With the extraordinary losses being suffered, the corporate tax base could be seriously eroded. You could have companies in 2029 not paying taxes because of their losses in 2019 or 2020.
Are you concerned about that? If there is an erosion of the corporate tax base, what does that mean for the rest of the taxpayers in the country?
Chief Economist, BMO Bank of Montreal
It depends incredibly heavily on the pace and the strength of the recovery, and I think that's job number one.
You raise an important point. There's quite a consensus around what this year's budget deficit looks like. There's almost no consensus around what it looks like in year two or year three, and again, that depends heavily on the recovery. I think a lot of the emergency programs will roll off, and we will see a fairly considerable decline in the deficit next year, provided we get the recovery we're looking at.
Underlying finances have been wounded as a result of this, and we could be looking at a triple-digit budget deficit next year even with a relatively solid recovery.
Liberal
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Thank you very much, Mr. Chair.
Mr. Wareham, thanks very much for your presentation. You raise a number of ideas, a very nuanced and complex analysis of the current reality and potential ways forward. Give us again a 30-second to 45-second elevator pitch about the main objective you're calling for.
Chief Executive Officer, Catch Capital Partners Inc.
Thank you, Peter, and thank you for inviting me today.
The nuance is probably important to understand because it has continued through the conversation and the questions. I believe the private sector is going to be an incredibly important part of the recovery, and there are a lot of investors.
In my world I talk to investors all the time, and a lot of investors are looking for the opportunity to actively participate in the recovery, whether it's from a mercenary standpoint, looking at where they might invest and buy things at an inexpensive price, but there's also an altruistic side to it; the private sector wants to help and pull together and support this.
There are massive regional disparities. I've put forward the idea of ensuring the private sector has a voice, particularly non-bank investment funds and organizations that might be trying to raise money for leasing or factoring or trade credit and so on to have the opportunity to....
Rather than simply asking for tax revenues to be put into industries, perhaps government could guarantee programs or fund a purchase whereby money is put into pools, and government supervision is done by private investors, private members of Canadian society, and worked into public-private partnerships to invest in areas such as small and medium-sized companies that are being so substantially damaged by the crisis.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Give me a concrete example. Company ABC finds itself in a very tough spot. How does what you're calling for manifest itself? Who's involved, how does it work and how would it be executed to help companies and the economy in the recovery phase?
Chief Executive Officer, Catch Capital Partners Inc.
No problem. I think they're two pretty closely interrelated things.
Peter, a simple example would be a manufacturing company. Their clientele is not 1,000 buyers but five, six or seven buyers. A customer whom they've dealt with for years may have always paid on time, or on 30-day or 40-day terms, and may all of a sudden have a substantial crisis on their hands that trickles down from another customer that makes them unable to pay an account receivable. A company that may be profitable and making sales and have a good work force and be strategically critical to a region that's been impacted may, all of a sudden, end up facing insolvency simply because a customer is unable to pay.
Therefore, one of the core elements of what I put forward was the idea of setting up a factoring program. I specifically suggested using our 263 community futures officers around the country who are closely connected to the economic development areas and specifically know who the key operators are in their own markets, and working with them, having a pool of funds that's available for private investors to put forward to help with factoring.
Similarly, an awful lot of our professionals, like dentists for example, are dramatically affected by the crisis because a key part of their business is the dental hygiene area. If you really look at the details of what's being done to dental practices and what they have to spend to set up to handle the aerosols that come from spraying water in peoples' mouths, dental practices, I think, are going to be one of the areas that are worst hit because the costs are enormous, but people aren't really talking about them.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Thanks very much, Jeff. I appreciate it.
I think I have 30 seconds left.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
What would you say to those who would respond to you that the Bank of Canada could organize something like that, or the banks could lead the way there? What is your response to that argument?
Chief Executive Officer, Catch Capital Partners Inc.
I would say that the banks have a very important role to play because, as I touched on in my presentation, their syndication departments have become somewhat of an old boys' club—no disrespect intended—primarily syndicating their own products through investment advisers. When they represent 80% to 90% of the investment assets, what they really need to do is to wave the flag and get onside with programs that are driven by investor demand and to get out and support private industry.
The government has a role to play in perhaps providing a guarantee with some oversight. The banks have a role to play in getting their investment advisers and their syndication departments behind it.
There are a lot of good ideas out there, and they don't simply extend to the bank-owned investment firms.
Liberal
Conservative
James Cumming Conservative Edmonton Centre, AB
Thank you, Mr. Chair, and thank you to all of the witnesses for being here.
I'll start with Mr. Perrault. In a report on the housing market that you did last month, you estimated that the rebound will be quick, partially because of a rebound in immigration.
I'm now wondering if you would change that prediction at all given the latest changes that CMHC has announced for tightening up of credit.
I might want to send that to Ms. Cooper, as well.
Chief Economist, Scotiabank
No, we wouldn't change that. Our perspective on the changes by the CMHC is essentially that they're moving out of a market that is going to be serviced by the private sector providers. At the very margin, it might have an impact on housing market activity in the urban centres, but we don't think it's going to have a significant impact, as I said, because they're basically freeing up space for the private sector folks to go in. Whether that was the intention or not, I think that's what's going to happen.
The bigger issue in the housing market from our perspective is simply the supply-demand imbalance, which is that the housing market in Canada remains generally under-supplied. Population growth has been really strong. Because of COVID there's been a slowdown in construction activity, so these factors conspire, if you will, to put us in pretty good standing when we reopen and folks are more comfortable going back out.
That's part of what you're seeing, I think, in some of the housing market activity in June and May. There's a sense out there that folks need to jump on a property while they still can, because there still is a shortage, generally speaking.
Chief Economist, Dominion Lending Centres
I do. I think the immigration issue is a very important one for the economy as a whole, and certainly for the housing market specifically. Permanent residents in Canada are typically not welcome at the Canadian banks, particularly new Canadians. They are going through alternative lenders. They're borrowing money outside the country and they're also going into the private sector.
Our assessment is that the CMHC's changes will have very little impact.
Conservative
James Cumming Conservative Edmonton Centre, AB
Thank you.
Mr. Porter, you were quoted, I think, as saying that the recovery would be bumpy and that there's never been a recession as widespread as the current coronavirus crisis. Going into this we started to see a slowdown in growth, fuelled, to a large extent, by the resource sector.
How concerned are you about this recovery and about how long it's going to take to get any kinds of growth rates again, given that we've had the coronavirus, and then on top of that a softening in the resource sector and the markets?